9 February 2010
The Reserve Bank of India (RBI), worried about soaring asset
prices, has ruled out one more round of restructuring of
bad real estate loans which may increase non-performing assets
of banks, but bring down prices of homes as developers sell
off properties to pay lenders, said at least two people familiar
with the matter.
“Let them lower the prices and clear their inventory,” a senior
RBI official had told bank
chief executives ten days
back. The banks were
seeking permission continue classifying
some bad real estate loans as
standard assets even after
developers failed to pay.
One more restructuring
would rather be a boon
for developers to hold on
to prices and profit, while
hurting consumers, the official had said.
“Banks are wary of the risk associated with commercial real estate because
demand for commercial space such as malls has come down and
(at the same time) there is a decline in demand in the residential
sector across all income groups,” said AC Mahajan, chairman
and managing director of Canara Bank. “This problem cannot be
solved by repeatedrestructuring of loans, but by reviving the market
by lowering the price, making property more affordable and showing
the customer some economic value in their purchases.”
The RBI allowed banks to restructure loans to both
manufacturers and developers and continue showing bad
loans as standard assets to save banks and developers
from financial strain after the collapse of Lehman Brothers in 2008.
That was for only those loans where the borrower was regular in
repaying dues until September 1, 2008 and where the bank was
able to restructure it by March 31, 2009.
While this helped banks and developers, consumers
were at the receiving end since real estate companies
held on to properties at high prices as they were not
obliged to pay immediately.
The subsequent pick up in economic activity and the
re-election of Manmohan Singh as the prime minister in
May 2009 pushed up all asset prices, including real estate,
to levels almost close to those prevailing before the credit crisis.
“There are signs that high levels of global liquidity are
contributing to rising asset prices,” RBI governor
Duvvuri Subbarao said on January 29 while reviewing the monetary policy.
The total outstanding loans of banks to the real estate sector
stood at Rs 88,581 crore as of November 2009, according
to RBI data. The asset classification norms, which decide
when a loan is to be treated as a non-performing asset,
are much stricter for non-manufacturing companies
which includes property developers.
For a manufacturing company, it is only after a loan
is restructured for the second time that lenders are
required to classify it as an NPA. But if it is for
non-manufacturing, which includes real estate, personal
loans or loans to brokers, it has to be classified as NPA
the moment it is restructured. Typicallyrestructuring of a
loan involves reducing the rate of interest and giving the
borrower more time to pay.
Banks can still go ahead and restructure real estate
oans without any special dispensation, but they have to
downgrade the account as substandard and set aside
10% as a provision for bad loans.
Manyreal estate companies survived the downturn
thanks to the RBI’s relaxation and the revival of the
secondary market. Firms such as Unitech,
DLF and Sobha Developers have raised funds
selling shares and pared down their debt.
Bankers believe that there are more deserving
candidates such as textiles for restructuring, than
real estate, as they continue to face demand shortfall
as the consumer in the West is still not back to his old way of spending.
“There are some sectors still under pressure like textile,
gem & jewellery, leather export and handicraft and
are more deserving for second time dispensation onrestructuring ,
if at all it is being considered,” pointed out TY Prabhu,
CMD of Oriental Bank of Commerce.
He declined to comment on matters related
torestructuring of real estate loans.
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